Milne has no finance background, yet his little operation is
moving between $30 and $50 million per month; it's on track to
move more than $350 million in the next year.

Unlike PayPal, Dwolla doesn't take a percentage
of the transaction. It only asks for $0.25 whether it's
moving $1 or $1,000.

We interviewed Milne about how he is building a credit card
killer and Square rival from the middle of the nation where VCs
and press are scarce.

BI: We hear you're making credit card companies angry.
How are you doing that?

Ben Milne: Ultimately we're trying to build the
next Visa, not the next PayPal. We're building a human
network based on how we think the
future of payments will work. The current model needs to be
blown up.

Dwolla started out of my old company. I owned a speaker
manufacturing company and we sold everything directly through a
website. I got really obsessed with interchange fees and
how not to pay them. Every time a merchant gets paid with a
credit card they have to give up a percentage. In my case,
I was losing $55,000 a year to credit card companies. I
felt like they were stealing from me — I was getting paid and
somebody was taking money out of my pocket.

So I thought, 'how do I get paid through a website without paying
credit card fees?' We pitched a bank, and amazingly enough
they said, 'We'll give it a shot.'

That was three years ago, so we've been working on the project
for a really long time. In December of last year we figured out
how to legally do what we do.

How many transactions are you doing?

The average transaction volume for Dwolla is right around $500
dollars. We move between $30 and $50 million per month.

What's your story?

I'm 28. I started my first company, Elemental Design, when
I was 18. I dropped out of University of Northern Iowa and
built that.

I started college because I thought that's where I was supposed
to go. I applied to one college, I got in, went, and
realized it wasn't for me. I had customers so I stopped
going to class.

We grew that company from a $1,200 investment to over one million
in revenue in four years, with three or four people and without
outside investment. The company was running itself and I
wanted to work on another project.

You don't have a finance background and yet you built
Dwolla?

It's been helpful in some strange ways. I think the first
financial institution we went into only listened to me for
entertainment. They let me get in to pitch the full
executive team at the bank.

I don't look like a banker, they knew I didn't have a banking
background. They actually agreed to work with Dwolla after two
hours of arguing with me and me scribbling on a whiteboard about
how the whole thing could work.

Had I been more typical, maybe they wouldn't have listened to
me. In that respect, I think that not knowing how the
mechanics worked was good — we just knew the way we wanted them
to work.

What did you do for the first two years when Dwolla
wasn't technically legal?

Well it was legal, we just couldn't operate outside of Iowa. For
the first two years we built out the platform. We did a sh*tload
of testing on a small scale because legally we couldn't launch
Dwolla nationwide. We spent two years inside of Iowa
fine-tuning Dwolla with the financial institutions, building out
some of the initial models, and trying to figure out how to
legally do what we do.

How'd you find a legal loophole?

Moving money is an exceptionally regulated business. We're
in Iowa, which is sort of conservative — I don't know if that
helped us or hurt us, but in the long term I think it helped
us. We figured to do this legally, we had two options: We
could take in a tremendous amount of money and go out and get
licenses, which is how most people do it, but we didn't have
access to that kind of capital here.

The other option was to bring in really strategic investors,
which is what we did. One of our investors is a financial
institution; one is a financial services company.

Our investors do credit and debit processing for banks. So
when you get a credit card from your bank, it's being issued by
companies like them. Our investors are also distributing
our product to financial institutions. So we've been
building a payment network, and we can do it legally because of
who our investors are.

We launched in December of last year and started moving $50,000 a
week. Now we're hovering around $1 million a day. We hit
that milestone in June or July.

Now we've quieted things down. We had to tap the brakes because
the way you handle money needs to be managed correctly. We
have some new partners on board and we're going to hit it hard in
December again. We've got some stuff coming out in December
that we think should be really big.

How does Dwolla work and how is it different from
PayPal?

With Dwolla, payments are made directly from your bank
account. No credit or debit cards are allowed. And
because they don't exist in the system, we don't have to bring
the fees into the system.

You can spend any amount of money and when you do that, the
person on the other end doesn't have to pay 1, 2, 3 or 4%. They
only pay $0.25 a transaction, which is especially helpful when
it's $1,000, $2,000 or $5,000 transactions. Obviously
PayPal becomes very cost prohibitive with those larger
transactions.

The biggest difference between ideas like this and a PayPal — and
PayPal is a phenomenal idea, Square is too — is that those are
built on top of networks like Visa and MasterCard. We're building our own.

Can users only send money to Dwolla
members?

No, you can send money to anyone. Only the person sending
it has to have a Dwolla account to initiate the
transaction. The person receiving it will have to sign up
for an account, but we've been surprised at the conversion
there. It's worked relatively well. We leverage
social networks really heavily as contact lists, which is one
thing we do really different. You can send money with an
email address or with a phone number, but the most popular way to
do it is to connect to Facebook and type in a friend's name.

We think, in the long term, sending money should be as easy and
effortless as finding a friend on Facebook. That's really a
behavior we try to mimic when it comes to peer-to -eer
payments. When someone does not have a Dwolla account, they
get a wall post that says, "You've got money." If a friend
sent that to you and it was their name and their face, you would
have a different emotional connection to that than an arbitrary
email from hellokitten32@aol.com. It's a totally different
interaction and one that's been really helpful for us in
converting users into the system.

What kind of purchases and money transfers is Dwolla
being used for?

We do pretty well in B2B; 11% of our business is
person-to-person, and the large majority is business-to-business,
consumer-to-business, and business-to-consumer. The
platform was originally built for taking in payments through
websites, and we have APIs that allow you to do that. We
haven't experienced the scale on those quite yet.

Where we've seen a ton of transactions right now is with people
paying monthly rent. If I'm a landlord and I want to
collect it, taking a credit card payment means missing out on 3%
of an $1800 charge. Dwolla is $0.25 cents.

The average Dwolla transaction is right around $500. PayPal takes
2.9% plus $.30 a transaction.

Why hasn't anyone side-stepped the credit card companies
before?

I think a lot of it is timing and luck. And a little bit of
getting your foot in the door. One of our investors is a
$1.8 billion financial institution. That's atypical anywhere, let
alone in Iowa. Having them on board allowed us to get into
a lot of rooms.

We serve everyone from the landlord taking in one payment to the
individual buying a coffee with their cellphone, to
billion-dollar corporations. Because we're so atypical and
look at mobile payments differently, we got in the room with the
Federal Reserve and the U.S. Treasury who allowed us to have a
conversation, not only from a corporate standpoint, but from a
government monetary distribution standpoint.

All banks are connected by one ACH system. Credit card
companies utilize that same system to pay off your credit card
charges. Banks internally set along that same system to
move money in their own banks. This system in its own right
is riddled with flaws — tons of fraud issues and waste and
delays. If you've ever had a payment take a few days to
clear, it's because they're waiting on that ACH system.

We want to fix that system between the banks, take out the delays
and make it instant. If we can create this ubiquitous cash
layer of distribution between consumers and merchants and
developers and financial institutions, that actually fixes the
problem.

No one has built a payment network in 30 years — since credit
cards. Everybody has concentrated on how we build a portal
for credit cards, from digital wallets to Square.

We don't believe in credit cards. We believe in
authorization and in lower cost transfers. Our generation
actually understands that when you buy sh*t, it comes out of your
bank account and you have to pay for that.

Since you're hooked up to bank accounts, users don't have
to have money in a Dwolla account to make a
transfer?

You can hold money inside of Dwolla but you don't have to.
We're finding a lot of consumers want to hold it there.
There is actually a positive average balance inside of Dwolla for
each consumer. We also have businesses that use Dwolla to
do payroll, so they'll keep a balance in there to cover the
cost.

You could have an account of $0 in Dwolla and there would
be no fee?

The only fee would be if someone paid you. We take a
quarter. We really want that quarter. It's all we
want!

How do Dwolla's mobile payments work?

We built out a mobile facing system; your mobile phone is just a
different view of a website, so a mobile payment is just an
authorization on your cell phone.

We take the website, plop it into the cell phone, start adding
proximity solutions so you can see which Dwolla merchants are
close to you, and then make it easy to pay once you go into a
store that accepts our system. Dwolla uses the GPS feature and
allows you to make a payment in real-time.

So you're saying if a Starbucks accepts Dwolla I'll be able to see
that on a Google Map, go there and charge the coffee to
my phone?

Yes, you'll just walk into the store and pay. It's like
checking in on Foursquare, you're just paying instead of checking
in.

We started in one coffee shop and now we're working with 400 or
500 merchants. Part of us scaling out is we have to
pick inflection points and then do some hiring to actively pursue
those communities and integrate with them. We'll be
beginning that in December.

Do banks have to pay to be integrated with
Dwolla?

No, we just give them the service and then your bank account
comes with Dwolla. There are 16 banks across the country
that come with Dwolla. We're talking to some huge financial
institutions about doing the same thing.

Banks are going to have trouble being relevant in mobile.
The fundamental issue with mobile payments is: how do you get to
your cash regardless of where you bank? No one has cracked
that nut. I truly feel like we've not only cracked that nut
but we're already selling it into financial institutions.

You don't have to pay the banks anything to log in and
access accounts?

Nope. We built a web service that connects with the
financial institutions and we do not have to pay them to work
with them. We're a service provider to them and we work at
the same time to make their customers happy.

Who are your investors?

We've raised $1.3 million.

Veridian Credit Union is one of our primary investors. The other
investor is a company called The Members Group which provides
credit, debit, ACH and security solutions to banks and credit
unions.

How big is the Dwolla team?

We're about 12 people — that's a beast of a startup in
Iowa. We were smaller last December, about 2 or 3 people,
so we've had pretty good growth. Most everyone is in Des
Moines.

We've experienced strong early stage validation and have
generated revenue that says "Hey, this thing can work
well." We've got this little fire and now we're trying to
figure out how to pour a sh*tload of gas on it, and really make
this scale out. The beginning of that is in December and
right now we're trying to ensure we have the right partners to
really kick that thing off really hard.

What happens in December?

Oh, it's going to be good.

What is it?

We've got this product coming out in December that solves a whole
bunch of really big problems inside of the ACH system, which all
banks are connected to, and it does it in a way that's never been
done before.

Are you raising capital?

We have a lot of really positive conversations going on at the
moment and we're trying to figure out who the right partner to
work with is. We're fortunate that our current investors
are very supportive of what we're doing.

How are you doing all this from Iowa? It seems like
this company should be on Wall Street.

Maybe. Right now Des Moines is the right place for us to
be. In the future there's going to have to be a lot of
business development outside of Des Moines and there are some
things we won't be able to do from here.

If we can convince people in Iowa, who are more conservative by
nature, to use Dwolla then my personal feeling is we've really
got something there. Had we been outside of Iowa, maybe we
would have tried to scale things up too quickly and maybe it
would have blown up in our faces. Maybe not.

In my own naive way, I would never build a company anywhere but
Iowa so maybe I just don't know any better. My personal
feeling is, if you want to build it, where you are is just an
excuse. Figure out what the area has to offer you and then
leverage that. Hustle your ass off and make it work.